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EU-ETS special report

The statements made by representatives of the European Commission welcoming the resolution by the ICAO Assembly on 4 October 2013 to implement a global market based mechanism (MBM) for international aviation emissions by 2020 looked to all the world as though the EU had secured a historic victory in what has been described by some commentators as the “international aviation emissions war”.

European Transport Commissioner Vice President Siim Kallas, who headed the EU delegation at the ICAO Assembly said:

“I am pleased that after long hard negotiations we finally have a global deal on aviation emissions. This is good news for the travelling public, good news for the aviation industry, but most importantly it is good news for the planet. We have also avoided a damaging conflict among trading partners.”

Fine words, and some truth in them, but what those words disguise is the almighty slap in the face that was administered to the EU by the ICAO General Assembly, and the embarrassing retreat the EU had to make on the implementation and enforcement of its EU Emissions Trading Scheme in the build-up to the ICAO General Assembly.

In order to put in to context the statements made by the European Commission immediately after the resolution passed by the ICAO Assembly on 4 October 2013, we have to look back at some of the history of the EU-ETS legislation.

EU-ETS legislative history in brief

The EU-ETS, implemented by way of Directive 2003/87/EC, was introduced to reduce greenhouse gas emissions by 8% below 1990 levels under the Kyoto Protocol. The “cap and trade” scheme set an overall limit on the total greenhouse gas emissions allowed from all land based installations. The European Commission included aviation within the scheme by way of Directive 2008/101/EC – the EU-ETS Aviation Directive. The EU-ETS Aviation Directive applied to both EU/EEA and non EU/EEA airlines and covered “Flights which depart from or arrive in an aerodrome situated in the territory of a Member State to which the Treaty applies.” This was known as the “all flights scope”.

Under the terms of the EU-ETS legislation, which came into effect on 1 January 2012, aircraft operators, whether EU/EEA airlines or non EU/EEA airlines, had to register with a competent authority in an EU Member State that would administer their participation in the scheme.

Airlines included in the EU-ETS, once registered, had to monitor their activities and emissions during 2010, and were required to report them to their competent authority by 31 March 2011. As with other emitters in the EU-ETS, each aircraft operator was obliged to remit allowances to the competent authority to cover its annual emissions by April of the following year. For each metric tonne of CO2 an aircraft operator emitted, it had to turn in one allowance. During 2012, 85% of the allowances were given free to participating aircraft operators, and 15% were auctioned. During the period 2013 to 2020, 82% of allowances would be given free, 15% auctioned and 3% would go into a reserve for rapidly expanding airlines and new entrants to the market.

The initial allocation of free allowances to each operator was based on a “benchmark” multiplied by the number of tonne- kilometres the aircraft flew on flights to, from, or within the EU during 2010. If an airline operator required more allowances than its free allocation it had to purchase them, and allowances could be traded. If an aircraft operator failed to comply with the EU-ETS it was to be subject to an “excess emissions penalty” set at €100 for each tonne of CO2 emissions exceeding the allowances surrendered, and the legislation provided for sanctions that included the possibility that a repeatedly non-compliant aircraft operator could be banned from operating in the EU. Each and every commercial aircraft operator flying into or out of or between EU/EEA airports had to set up systems and processes, at great cost, to monitor their CO2 emissions, have them independently verified, then submit their emissions data to their administering EU Member State in order to comply with the EU-ETS and qualify for the distribution of free allowances for 2012. The first distribution of free allowances for 2012 occurred in February 2012.

Many non EU/EEA countries, in particular the US, China, India, Canada, Brazil and Russia, opposed the imposition of the EU- ETS scheme on their carriers. The principal objections raised by these countries was that the EU-ETS required allowances to be submitted for the carbon emissions emitted for the portions of flights to and from the EU that occurred outside of EU airspace including the high seas and portions of flights over countries that were neither the point of origin or destination. Several countries contended that this violated their sovereignty, and that the EU-ETS was an attempt to impose extra-territorial rules on third party countries and amounted to a charge for using a third country’s airspace. The objecting countries also asserted that the EU’s unilateral inclusion of aviation provisions in the EU-ETS, which affected non EU/EAA, carriers, undermined ICAO’s role as to the proper forum to address carbon emissions from international aviation, as mandated by the Kyoto Protocol.

The EU defended its position and asserted that the EU-ETS was consistent with the Kyoto Protocol in that the Protocol did not confer an exclusive mandate upon ICAO, and that bringing international aviation emissions under the EU-ETS did not contradict or undermine ICAO’s role. The European Commission contended that ICAO’s 2004 decision ruling out the option of a global emissions trading scheme for aviation left the EU free to impose its own emissions trading scheme without violating ICAO agreements. The European Commission also denied that the EU-ETS infringed national sovereignty or was inconsistent with the Chicago Convention, the EU-US Open Skies Agreement, or customary international law.

Hostilities escalate

The war of words between the EU and non EU/EEA countries over the unilateral imposition of the EU-ETS escalated into open hostilities and jingoistic talk of a trade war between the EU bloc and non EU/EEA countries objecting to the implementation and enforcement of the Scheme.

Litigation was initiated by the US airline association, Airlines for America, and several US airlines, in the English High Court in December 2009, challenging the legality of the measures implementing the EU-ETS Scheme in the UK (the administrating Member State for the US airlines challenging the legality of the Scheme). As the claim challenged the validity of EU legislation, in July 2010, the English Court referred the case up to the Court of Justice of the European Union (CJEU) for a preliminary ruling. The US airline association and airlines challenged the validity of the legislation on several grounds, claiming that it violated the Chicago Convention, the EU-US Open Skies Agreement, the Kyoto Protocol and various principles of customary international law regarding airspace sovereignty, and the freedom to fly over the high seas. In December 2011, the CJEU, which is the highest court in the European Union, rejected all of these claims and ruled that the EU-ETS scheme was legal, and was not in breach of international law, with the effect that all airlines operating in and out of EU countries had to comply with the EU-ETS rules, starting on 1 January 2012.

Following this judgment, which could not be appealed, the war of words recommenced, with the US airlines party to the unsuccessful legal challenge before the European Court saying that they would “comply under protest” with the ruling, and that they would pursue other options in the English courts and through governmental pressures. IATA’s Director General, Tony Tyler, issued stark warnings to the EU about the large body of international opposition, further legal challenges, and threats of non-compliance from foreign carriers.

“Unilateral, extra-territorial and market distorting initiatives such as the EU-ETS are not the way forward. What is needed is a global approach through ICAO.”

The US Congress passed legislation in the form of The European Union Emissions Trading Scheme Prohibition Act 2011, prohibiting US aircraft operators from participating in the EU- ETS, and directed the US administration to negotiate and take other actions to ensure that US aircraft operators were “held harmless” by any unilaterally imposed EU legislation.

Strong vocal opposition to the imposition and enforcement of the EU-ETS came from most airline associations and many countries, including China, India, Brazil, Russia, the UAE and Japan. A declaration was signed by these countries and 18 other countries in September 2011, recording their opposition to the EU-ETS, and a warning was issued to the EU that retaliatory action would be contemplated by way of sanctions and other measures if steps were taken by the EU to try and enforce the EU-ETS Aviation Directive. China was particularly vociferous in its opposition to the EU-ETS, warned the EU that a trade war could break out, and threatened the withdrawal of an order for 10 A380s from Airbus. The China Air Transport Association was reported as saying it would not allow China’s four major airlines to comply with the scheme, and that it would mount a further legal challenge to the implementation of the EU-ETS in the English High Court. In March 2012 a group led by Airbus wrote to EU politicians urging them to put the EU-ETS Scheme on hold until a global action plan for emissions was agreed.

Tensions continued to escalate and the opposition to the Scheme intensified further with the formation of a coalition of 17 non EU countries dubbed “the coalition of the unwilling”, which met in August 2012 in Washington to reaffirm their opposition to the application of the EU-ETS Scheme to non-EU carriers. In October 2012, India’s aviation minister urged the aviation community in the Asia-Pacific region to oppose the EU-ETS, following its own directive to all India based airlines operating to Europe not to comply with the EU-ETS.

Reportedly, all major US aircraft operators were still complying with the ETS reporting requirements, albeit under protest, but several Chinese and Indian carriers had missed a March 2012 reporting deadline – which would have enabled EU administering states to apply penalties if the carriers missed a new June 2012 deadline. The biggest checkpoint however was looming in April 2013, which was the deadline for the submission of allowances by all airlines covered by the EU-ETS for flights to and from the EU.

Stopping the clock

Although senior EU officials appeared unmoved by the widespread and increasingly hostile opposition to the EU-ETS, and said that they would not retreat from taking enforcement action against non-compliant airlines, the political pressure from non-EU governments was clearly taking its toll. The spectre of a trade war, that had once looked remote, started to look very real, and the European Commission started to buckle under the pressure.

The climbdown from the European Commission, when it came, was both dramatic, and in some quarters, unexpected. It followed an ICAO Council meeting on 9 November 2012, at which ICAO agreed to establish a high-level group to develop a global system to tackle airlines’ carbon emissions by the next ICAO General Assembly in September 2013. At a press conference given three days later the EU Commissioner for Climate Action, Connie Hedegaard, announced:

“In order to create a positive atmosphere around these negotiations, I’ve just recommended in a telephone conference with the 27 Member States that the EU “stops the clock” when it comes to enforcement of the inclusion of aviation in the EU-ETS to and from non-European countries until after the ICAO General Assembly next Autumn.”

She went on to say:

“But let me be very clear: if this exercise does not deliver – and I hope it does, then needless to say, we are back where we are today with the EU-ETS. Automatically.”

In other words, the retreat was temporary, in that the European Commission would “stop the clock” for a year on the enforcement of carriers’ obligations under EU-ETS on all flights to and from non-European countries, but the EU-ETS would continue to be enforced for all intra-EU flights. Perhaps it is fairer to say that it was a partial climbdown by the European Commission, as opposed to a full scale retreat, but the announcement looked to have averted a prospectively disastrous trade war between the EU and its key international trading partners.

The “stopping of the clock” recommendation was subsequently translated into a draft decision by the European Commission, that proposed a temporary derogation from the EU-ETS Aviation Directive, exempting EU Member States from the obligation to take sanctions against operators of flights to and from non EU/EEA airports until 1 January 2014 for the non-surrender of allowances in respect of their 2012 emissions. In order to take advantage of the temporary derogation, all non EU/EEA carriers had to return the free allowances that had been received for 2012 emissions to the EU Member States that were administering them.

The Commission made it clear that the clock was being stopped to enable progress to be made at the ICAO Assembly in Autumn 2013, and defined “progress” as the satisfaction of two pre-conditions, namely: the development of a roadmap for a global MBM scheme, and agreement on a transitional framework approach from regional MBMs (like the EU-ETS) to a global MBM agreement. The Commission said that if these conditions were not met, the clock would “restart” and the original scope of the EU-ETS covering all flights to and from the EU from outside the EU/EEA would “snap back” automatically. The Commission confirmed that in the meantime, the EU-ETS Aviation Directive would continue to apply in full to all flights between airports in the EU.

The draft decision “stopping the clock” was quickly approved by the European Parliament and the European Council, and was published in the form of an amendment to the EU-ETS Aviation Directive on 25 April 2013.

The non-EU countries that opposed EU-ETS were temporarily appeased by the clock being stopped on enforcement, and the European Commission managed to redirect some of the attention away from the climbdown by asserting that the pressure was now firmly on ICAO to come up with a workable global emissions scheme for international aviation. However, predominantly intra-EU aircraft operators, including in particular those represented by the European Low Fares Airline Association (ELFAA) and the European Regions Airline Association (ERA), objected to the revision of the scheme continuing to apply only to intra-EU flights, and asserted that the temporary derogation was potentially distortive of competition. ELFAA initiated legal proceedings in the English High Court on behalf of its member airlines, which include Ryanair and easyJet, challenging the temporary derogation on the basis that it was a misuse of power, a decision taken for political reasons by the European Commission, and contravened the environmental effectiveness principle, which is the stated objective of the EU-ETS. ELFAA claimed that the Commission’s decision breached the EU principle of equal treatment, and that it was based on manifest errors of assessment, and breaches of essential procedural requirements by European institutions, including the fact that it discriminates between intra and extra EU flights (thereby potentially distorting competition), and that no impact assessment of the temporary revision to the EU-ETS Aviation Directive was undertaken. ELFAA also claimed that the revision breached principles of proportionality, and in particular that the benchmark for the allocation of free allowances was not recalculated following the greatly reduced scope of the scheme brought about by the derogation. ELFAA asked the English Court to refer the matter to the European Court, but requested a stay of their proceedings until the outcome of the ICAO General Assembly in September 2013 was known.

So, all the pressure was now redirected on to ICAO to come up with a global emissions plan for international aviation emissions that would meet the EU’s conditions, and prevent the “automatic snap back” to the original EU-ETS “all flights scope”.

A compromise is sought

In advance of the ICAO General Assembly in September 2013, it became clear that EU negotiators would offer a compromise, and in fact that is exactly what happened. EU negotiators apparently offered during the negotiations to continue the EU- ETS scheme until 2020, but only to apply it to intra-European flights and the portion of flights to and from third countries that occurs in European airspace, in return for a commitment that other countries would agree to develop a global MBM scheme addressing international aviation emissions by the next ICAO General Assembly in 2016, and apply it by 2020.

When the ICAO General Assembly convened, discussions between the attending states’ negotiating teams were apparently very contentious – perhaps not surprising given the history of the EU-ETS Aviation Directive. After days of closed- door bilateral negotiations, a revised draft resolution was apparently presented to the executive committee of ICAO on 2 October. The revisions focused on two key paragraphs that were the subject of fierce disagreement at the first plenary meeting of the ICAO General Assembly on 25 September.

One of the paragraphs concerned how interim market based mechanism schemes, such as the EU-ETS, would be applied until a global scheme was put in place, and the other paragraph concerned the exemption of countries that only have a small share of global air transport activity. The revised draft text urged countries to engage in bilateral and multilateral negotiations to reach “mutual agreement” on the application of interim MBM schemes to international flights until a global MBM scheme was put in place. This proposed wording would have dealt a fatal blow to the continuation of the application of the EU-ETS to non EU-EEA countries, as there would never be “mutual agreement” on the application of the EU-ETS to foreign carriers flying in and out of the EU. The wording that was proposed by the EU would have allowed a unilateral MBM scheme like the EU-ETS to be applied to that portion of an international flight conducted inside a State’s airspace, without consultation. The revised draft text presented on 2 October to the Assembly also urged countries to grant route-based exemptions from MBM schemes on all operations to and from countries whose international civil aviation activity is below a threshold of 4.7 billion in revenue per tonne kilometres (RTK) in 2014. This revision of the so called “de minimis” clause would have replaced the previous threshold suggested to exclude all “developing countries” contributing less than 1% of global aviation emissions. The effect of this revision would have been to exempt the airlines of all but 21 of the 191 countries that are member states of ICAO.

An alternative draft resolution was then apparently presented on 3 October by a group of nations including China, India and Russia which called for bilateral and multilateral negotiations on interim MBM schemes, and an exemption for MBM schemes on routes to and from countries below the 1% RTK threshold. This proposed draft also modified another paragraph to require ICAO to take account of the principle of “common but differentiated responsibility", which would recognise that developed nations have more resources to tackle climate change. Apparently the EU offered to drop four key paragraphs of their draft resolution that developing nations found particularly objectionable, but even that olive branch was rejected, and one attendee at the General Assembly meeting reported that the negotiations were becoming “bruising” and said “everyone’s castles are crumbling – the EU’s, IATA’s, and ICAO’s”.

In the end, in spite of intensive negotiations, the Assembly was not able to agree on new language for a meaningful transitional framework for national and regional emissions trading schemes to be applied prior to a global MBM scheme taking effect. Unusually for an ICAO Assembly, roll-call voting was used on the drafting options available for the wording on the role of national and/or regional schemes until a global MBM scheme came into effect.

The Resolution that was actually passed by 97 to 39 votes by the ICAO Assembly on 4 October states that countries or groups of countries implementing or designing new and existing market-based mechanisms for international aviation before the global market based mechanism takes effect should

“engage in constructive bilateral and/or multilateral consultations and negotiations with other States to reach an agreement; and

grant exemptions for application of MBMs, on routes to and from developing States whose share of international and aviation activities is below the threshold of 1% of total revenue tonne kilometres of international civil aviation activities, until the global scheme is implemented.”

In other words, the all-important paragraph in the draft text that would have allowed the EU to unilaterally apply the EU-ETS within European airspace, without consultation, until a global MBM scheme was put in place, was removed. It was a humiliating defeat for the EU.

It was clear therefore that the two strict pre-conditions set by the EU for “stopping the clock” on the enforcement of the EU- ETS had not been properly satisfied by the outcome of the ICAO General Assembly. In a Memo published on 16 October 2013, the European Commission said: “The (ICAO) Assembly did not agree to new language on a meaningful framework for national and regional measures to be applied prior to a global MBM taking effect. After two weeks of difficult and intense negotiations, the 191 ICAO Member States agreed at the ICAO Assembly to develop a global market based measure to limit CO2 emissions from international aviation, which should be ready for implementation by 2020. This is an important achievement. The agreed ICAO Assembly Resolution foresees a decision on the actual implementation of the global MBM scheme at the next ICAO Assembly in 2016. In the coming three years substantive progress on the design of the scheme needs to be made at a technical level.” Not quite a roadmap then.

To be fair to the European Commission, the wording of the Memo does accurately reflect the wording of the ICAO Resolution, and what has been agreed at the ICAO Assembly is some sort of an achievement. Whether it is in fact the “historic milestone for air transport and for the role of multilateralism in addressing global climate change” and a “landmark achievement”, as claimed by the ICAO Council President, Roberto Gonzalez, is a matter of debate, not least because the “roadmap” for the implementation of a global MBM scheme in the ICAO Resolution looks very vague. If it is a roadmap, it is certainly not a well-marked and well-lit road, and there seem to be no definable way points on the road by which progress can be measured, save for the references to the development of a global MBM scheme and reporting back on the “possible options” by 2016, and the reference to “implementing” a global MBM scheme by 2020.

In summary therefore, very little by way of concrete measures was actually agreed at the ICAO Assembly. The measures that were agreed are couched in vague aspirational terms and, in essence, ICAO has another three years to work on the “possible options” for a global MBM scheme. Clearly there was no landmark victory for the EU, save that the EU can say that by striking out on its own and imposing an EU-ETS unilaterally on foreign carriers, it forced the hand of ICAO into agreeing to implement a global MBM based scheme. Otherwise, any claim by the EU to victory is hollow, and most commentators would agree that the EU suffered a humiliating defeat in the ICAO negotiations, and had to beat a hasty retreat back to Brussels.

Peter Liese, the European Parliament Rapporteur for the inclusion of aviation in the EU-ETS, probably summed up the outcome of the ICAO General Assembly most accurately as “a very modest result”. What he went on to say was an insight into what might happen next:

“Although there is now finally a decision that by 2016 ICAO will install a global market based measure for the reduction of international aviation emissions which comes into force in 2020, the text was weakened, and if and how it comes to agreement in 2020, is in the stars. Unfortunately, we have no guarantee that a system will be introduced in 2020 and that the benefit for the environment is substantial. There are too many ifs and buts. Nevertheless, this is the first step which was achieved by the EU. Alone, ICAO would not have made it so far, because of the industry domination of third countries’ positions. Therefore the EU has to keep the pressure high.”

Peter Liese said that he would have to analyse the results and consequences of the ICAO Assembly carefully:

“In our current law, it is not possible to suspend the emissions trading for international aviation until 2020. We must now carefully analyse the legal and political options we have to continue our systems in a modified form. Not only the text of the resolution is crucial. In my estimation, the European Parliament will not agree that until 2020 we only cover intra-European flights, and this is not even complete. The inclusion of all flights taking off and landing in Europe, for the part they travel in European airspace is indispensable. This is a matter of fairness against European airlines and the competitive situation and the environment. If the European Parliament does not agree with the Council by April on a new legislative text, legislation as originally planned will come into force for intercontinental flights taking off or landing in Europe. The pressure medium remains.”

Liese’s comments highlighted the dilemma that the ICAO resolution had presented to the EU. Because the temporary derogation had spelled out that there would be an automatic reversion, or “snap back” to the “all flights” scope of the original EU-ETS if the EU pre-conditions were not met, the EU would have a number of options as follows:

it could apply the automatic snap-back to the all flights scope under the original EU-ETS that was applied before the “stop the clock” derogation”; or

it could draft new legislative proposals to amend permanently the EU-ETS Aviation Directive so as to cover only intra-EU flights; or

it could abandon altogether the inclusion of aviation in the EU-ETS; or

it could draft new legislative proposals for the implementation of a revised scheme continuing to cover all intra-EU flights and that portion of flights between the EU and third countries that occurs over European airspace.

Of these four options, clearly option (i) was unpalatable, as the reversion to an all flights scope ETS would lead to a resumption of hostilities between the EU and its key trading partners, and quite possibly a trade war. Option (iii) would also be unpalatable, which would only leave options (ii) and (iv). Most commentators predicted that option (ii) would be chosen.

The European Commission was under considerable time pressure to decide how to proceed, because of the 30 April 2014 deadline for the submission of verified emissions reports and the surrender of allowances.

The EU’s rearguard action

What happened next was quite unexpected.

On 16 October 2013 the European Commission announced that it would propose an amendment to the EU-ETS so that international aviation emissions would be covered only for the part of flights that takes place in European regional airspace. The “adjustment in the legislation” as it was called in the announcement by the European Commission, would apply from 1 January 2014 until a planned global market-based mechanism becomes applicable to international aviation emissions by 2020, in accordance with the ICAO Resolution.

The key features of the revised EU-ETS scheme proposed by the European Commission would be as follows:

All emissions from flights between airports in the European Economic Area (the EEA covers the 28 EU Member States plus Norway and Iceland) would continue to be covered.

From 2014 to 2020, flights to and from countries outside the EEA would benefit from a general exemption for those emissions that take place outside EEA airspace. Only emissions from the part of flights taking place within EEA airspace would be covered. For each calendar year from 2014 to 2020 the proportion of the flight concerned will be calculated by Eurocontrol, and will cover the distance from 12 nautical miles from the furthest point on the outer coastline of an EEA territory to the EEA airport of departure or arrival, with the exception of intermediate distances flown over third countries or sea areas between EEA Member States’ territories in excess of 400 nautical miles.

To accommodate the special circumstances of developing countries, flights to and from third countries which are not “developed countries”, which emit less than 1% of global aviation emissions will be completely exempt. This will include routes to around 75 countries on a non-discriminatory basis.

Overflights of EU/EEA countries are exempt.

To further simplify the EU-ETS, no action will be taken against non-commercial aircraft operators in respect of emissions from small aircraft emitting less than 1000 tonnes of CO2 a year.

In a second Memo published by the European Commission on 16 October 2013, further details of the proposal to revise the EU-ETS Aviation Directive were set out. The Commission said it would like to see the proposal for the revised EU-ETS Aviation Directive agreed by the European Parliament and Council by March 2014, in order to provide clarity for aircraft operators, who would otherwise have to surrender allowances for all their emissions on flights in 2013 to and from third countries by 30 April 2014. The Memo explains that the proposal would require EU Member States to adopt and publish the necessary laws, regulations and administrative provisions within 3 months from its entry into force, and gives guidance on how compliance obligations will change for flights to and from third countries. The Memo says that emissions from flights operated in 2013 to and from third countries will be fully exempted from the EU-ETS, because implementation of the revised EU-ETS will require some adjustment to calculations regarding reporting of emissions, free allocation and auctioning shares, which will need to correspond to the new scope of the EU-ETS.

The Memo also explains that there will be an “extraordinary two-year compliance cycle” for emissions for 2013 and 2014, with emissions for these two years only having to be reported by carriers by 30 April 2015 in the form of two emissions reports, and allowances only having to be surrendered by 30 April 2015 as well. The proposal is that after this transitional period has finished in 2015, the annual compliance cycle will resume. The Memo confirms that the EU intends to submit formal reservations to ICAO on the following points of the ICAO Resolution: (i) the ambition level of aspirational goals; (ii) the totality of the amended framework language on national and regional MBMs; and (iii) the inclusion of a reference to the UNFCCC principle of “common but differentiated responsibilities and respective capabilities” (shortened to CBDR-RC) in the annex to the ICAO Resolution, which contains a list of guiding principles for market based mechanisms.

The Memo expressly refers to a proposed review in 2016 that will take place following the 2016 ICAO Assembly, when the Commission will report back to the European Parliament and Council on the actions taken by ICAO to implement the global market-based mechanisms to apply to emissions in 2020, and make proposals as appropriate. It says that after the 2016 ICAO Assembly, the EU-ETS Aviation Directive should be amended as appropriate to provide for the implementation of the global MBM scheme, and in the event a global MBM scheme is not implemented by ICAO, the report should consider the appropriate scope of coverage of emissions from flights to and from third countries in the continued absence of a global MBM scheme.

The reaction of the European Commission to its defeat at the ICAO General Assembly and its retreat back to Brussels, by announcing a proposed revision to the EU-ETS Aviation Directive to cover only flights in European airspace, could be regarded as a classic rearguard action.

The industry reacts

Representatives from airline industry bodies have been quick to voice their concerns about the European Commission’s proposal to reimpose the EU-ETS on all flights over the European Economic Area.

He said that discussions at the ICAO Assembly clearly indicated that states around the world want a global scheme, and not a regional one. He gave credit to Europe for “having forced this up the international agenda” but urged it to withdraw the proposed revision to the EU-ETS.

The Director General of the Association of Asia Pacific Airlines, Andrew Herdman, said: “The inclusion of international airlines without the consent of their respective governments is likely to meet with strong opposition”, and stressed that efforts should be focussed on the development of a global market-based framework.

Abdul Wahab Teffaha, Secretary General of the Arab Air Carriers Organisation, warned of prospective trade wars if the EU decided to proceed with the proposed revisions to the EU-ETS scheme.

A representative for the US airline association Airlines for America, urged the European Council and Parliament to halt the Commission’s proposal which it alleged “flew in the face of the agreement reached at ICAO”.

The Association of European Airlines, which represents the main European network carriers, said it did not oppose the proposed revision, but was surprised the Commission was proposing it, in view of the adoption by ICAO of the mutual agreement principle on regional MBM schemes.

The European Regions Airline Association, which represents European regional carriers, stated that the EU-ETS should now be suspended entirely until after the outcome of the next ICAO Assembly in 2016 is known, in expectation of reaching an agreement on a global MBM scheme to be implemented from 2020.

In contrast, the European Low Fares Airline Association said the Commission’s proposals do not go far enough:

“ELFAA is surprised and disappointed to see the Commission rushing to propose a further dramatic weakening of its own system instead of delivering on its unequivocal ultimatum to ICAO to revert to the full, legally-proven scope of the EU-ETS. The proposal is long on further exemptions but short on environmental protection, and short too on any measures to correct the discriminatory and distortive effect on intra EU/EAA operators of the current ill-conceived derogation.”

It is clear that the European Commission has caught everyone by surprise with its proposed revision of EU-ETS to cover flights over European airspace.

It seems likely that these first reactions from the airline associations’ representatives will escalate into a further war of words, involving the foreign governments of airlines affected by the proposed revision of the EU-ETS, unless significant amendments are made to the Commission’s draft proposal during its legislative passage through the European Parliament and Council.

The Commission’s proposal will now need to go through the co- decision process, with the draft resolution passing through the European Parliament and the European Council. This process will have to take place relatively quickly, because if the reduced EU-ETS scheme is voted through, it will need to be passed into law by April 2014.

All in all, we are in for an interesting 3-4 months!

Stop Press: Council and Parliament debate the future of EU-ETS

As we go to print, the European Council and Parliament have been considering the Commission’s proposed revision of EU- ETS to cover flights over European airspace. Those proposals have been given a very lukewarm reception.

Britain, France and Germany have already announced that they want to scale back the scope of the Commission’s proposals, effectively continuing “stop the clock” with the result that EU- ETS will only apply to those flights that operate entirely within EU/EEA airspace. The UK Department of Energy and Climate Change (“UK DECC”) believe that the Commission’s proposals have misread the international mood and do not reflect "politics on the ground", noting that it would be difficult for Europe to unilaterally impose any kind of emissions trading scheme on non-European airlines, when this possibility was roundly criticised and rejected in the ICAO Assembly. UK DECC has expressed confidence that Britain, France and Germany can convince the other Member States to follow their lead, although they may well encounter some opposition from countries like Denmark which has emphasised that the aviation sector must take responsibility for its share of greenhouse gas emissions.

There has also been some disquiet about the Commission’s proposals from the European Parliament, but here the position is more likely to be evenly split between those that oppose any retreat from the original, full-scope EU-ETS, those who support the Commission’s revised position, and those who support the Council. Peter Liese, the European Parliament’s Environment Committee Raporteur, wants to tighten the Commission’s proposals, making it clear that the EU will have no alternative but to snap-back to the original, full-scope EU-ETS if no roadmap is agreed by ICAO in 2016. However, the rapporteurs from the Transport and Tourism Committee (TRAN) and the Industry, Research and Energy Committee (ITRE) have recently indicated that they would support an extension to “stop the clock”, aligning themselves more closely with the joint British- French-German position.

These recent developments have not been welcomed by the environmental lobby, which has criticised EU lawmakers for giving in too easily to the “coalition of the unwilling” and for prioritising Airbus aircraft orders over the environment. ELFAA is watching developments, but has pledged to continue their legal action if lawmakers dilute the scope of EU-ETS, seeing this as an attack on the environmental effectiveness of the scheme whilst maintaining claims of competitive distortions that will disadvantage point-to-point European operators. However, IATA and some non-EU airline associations have continued to object to the Commission’s proposals, arguing that they side-step the ICAO process, and will lead to trade wars, retaliatory measures, and competitive and market distortions. These organisations will no doubt welcome any measure that seeks to dilute those proposals in the short-term.

The only certainty is that the EU must have its legislation in place by April 2014. What that legislation ultimately looks like is still up for grabs.

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